Franchises

What You Need to Know About Franchises

There are several paths to business ownership, including staring a new business, buying an existing business, and buying a franchise. Not all require you to come up with a unique business idea. Many business owners like the idea of buying a business that is already a proven brand name. If you feel the entrepreneurial pull but don't necessarily want to start your own business from scratch, then buying a franchise may be an excellent option for you.

Here is what you need to know as you start moving down the path of becoming a franchisee.

What Is a Franchise?

A franchise is a business that provides an opportunity for individuals to own and operate a single location (or multiple locations) of the business through a license agreement. The license agreement requires that you, the franchisee, pay an up-front franchise fee in exchange for use of the franchisor's brand name, trademark, operating systems, marketing materials, access to proven products and services, and often an exclusive territory. Some franchises that may sound familiar to you include McDonalds, Subway, Molly Maid and Anytime Fitness.

In the United States, a business license is considered a franchise when the franchisee is closely associated with the franchisor's brand; the franchisee pays a fee to use the brand; and the franchisor has some control over and provides assistance in the franchisee's business.

The Pros and Cons of Buying a Franchise

Buying a franchise is not a decision to be taken lightly.

There are many plusses and minuses to the decision, and it is important that you consider all aspects of franchising before diving in. Here are some of the biggest items on the pros column:

You get access to proven operating systems. This includes computer systems, financial systems, marketing systems, support systems, and every other type of system that will get your franchise up and running.

There is already an established customer base. The is the biggest commonality among all franchises. Without existing customers, there wouldn't be a franchise.

Training is usually available. If you don't have experience owning a business, or selling the products and services specific to your franchise, training from the franchisor may be available.

You will be a business owner. Although you are buying into a franchise and agreeing to follow the franchisor's direction, you will still be an owner of your individual business.

There is less risk. Buying a franchise means buying a business that has already gone through the most common startup challenges and successfully made it to a successful brand.

On the other side of the coin are the cons. Here are some negative aspects of buying a franchise that you should consider:

The franchise fee can be significant. The initial fees required depend on the type of franchise, but it can add up to more then it would cost to start your own business.

There are also ongoing fees. In addition to your start-up costs, most franchise agreements also require that you pay monthly royalty fees to the franchisor.

Your business is dependent on the franchisor. If the franchisor's brand faces challenges like negative publicity or reputation damage, your local franchise will face the same issues.

You will have limited opportunity to be creative. When you buy a franchise, you agree to follow all of the rules of the contract that the franchisor has for the brand, products and services, marketing and more.

There are no guarantees. Just like in traditional business ownership, there is no guarantee that you will be successful. So while the risk is minimized, there is still risk.

Make sure you take the time to consider these and other pros and cons before deciding to purchase a franchise. It can also be helpful to talk to a current franchise owner to learn what the actual day-to-day experience is like. Ideally, you will be able to reach out to a franchisee of the franchise you are considering, but talking to anyone who owns any type of franchise can be a big help in understanding what it takes to be successful.

Understanding Franchise Agreements

Franchise agreements can be some the most complicated legal documents in the business world. Every franchise agreement must adhere to the Federal Trade Commission's Franchise Rule. The Franchise Rule requires that franchisors provide all of the information franchisees need to weigh the risks and benefits of buying the franchise, including a disclosure document with information about the franchise, its officers, and other franchisees.

From there, the sections in a franchise agreement can vary but some of the other information you will find in most franchise agreements include: the term of the agreement, information on the franchise fee and royalty fees, the territory or exclusive area you will operate in, training and support that will be provided by the franchisor, trademark usage terms, renewal rights and resale rights.

It is very important to enlist legal help from an attorney when you are reviewing a franchise agreement, especially if you are new to this. Look for an attorney who has franchise experience to ensure you have all your bases covered.

Costs Associated With Buying a Franchise

Buying a franchise can be a very costly endeavor. While the specific costs of buying a franchise can vary, some of the expenses you can expect include:

Franchise fee: The franchise fee can be anywhere from $10,000 to over $100,000, depending on the type of franchise you are buying.

Royalty fees: Many franchisors require that you pay ongoing monthly franchise royalties in additional to the franchise fee.

Professional fees: Legal and accounting fees can add up quickly, especially in the early stages of the franchise as you review the franchise agreement.

Real estate costs: Your franchise agreement may include leasing property, but if it doesn't you will need to set aside funds to acquire a physical business location.

Start-up costs: You may need to purchase supplies, inventory, equipment, furniture, marketing collateral and more in order to get your franchise up and running.

How to Find Franchise Opportunities

There are many franchise opportunities you probably already know about, but the best franchise for you may not be the biggest brand name out there. Not only do the big national franchises typically cost a lot more to buy, but they also can be hard to get because there may not be a lot of territories still available.

Questions to Ask When Evaluating Franchises

Once you have considered all of the elements of buying a franchise and located the opportunity that is right for you, make sure you take time to conduct due diligence so you can make an informed decision about moving forward. Questions you should ask include:

How many franchises exist, where are they located, and what is the average profit level?

What are the franchise fees? What are the royalty fees?

Are there financing options available?

On average, how long does it take to make a profit? What is the profit potential?

What is the competition like?

What type of training and support is available?

Just like any business, the success of the franchise is dependent on the drive, determination and dedication of the business owner. It is up to you to choose the right franchise opportunity and utilize the systems and support provided by the franchisor to be as successful as you possibly can in your franchise. If you're still on the fence about going the franchise route, review this list of 10 top reasons to buy a franchise and explore the franchise tools provided by the Small Business Administration.